Dr. Haiyang Li

Rice University & CEIBShaiyang@rice.edu

The Role of Political Capital in China: Domestic vs Returnee Entrepreneurs

Background: Two Competing Views

Decline of the value of political capital (Guthrie, 1998; Nee, 1989, 1991) in transition economy Firms no longer need government to steer

resources Government will lose their power

Retaining/increase of the value of political capital Rona-Tas (1994): Power conversion Walder (2002): As long as the state controls

access to finance and technology and enforcement of banking regulations, political capital will continue to be valuable.

Two Studies

How do institutional changes affect the role of entrepreneurs’ political capital in resource acquisition in a transition economy? (Li, Zhao, & Lu, working paper)

Returnees vs locals: Who perform better in China’s technology entrepreneurship? (Li, Zhang, Li, Zhou, & Zhang, SEJ 2012)

Resource acquisition for entrepreneurial firms Liability of newness and lack of performance

record Information asymmetry

Institutional constraints for resource acquisition of entrepreneurial firms in a transition economy Political authorities still have allocative

control over key factor resources The existence of institutional voids and

underdeveloped intermediate institutions Lack of legitimacy of private firms; suffer

social and political discrimination

Resource acquisition in transition economies

Political capital embodied in the ties with key political institutions provides direct avenue to reach political resources

Enhance their social and political legitimacy, increasing their credibility for resource acquisition.

In general, entrepreneurs’ political capital will facilitate firms’ resource acquisition in a transition economy.

Political Capital and Resource Acquisition

Key argument With the development of market institutions in a

transition economy, institutional constraints will be reduced, which may affect the efficacy of political capital in resource acquisition.

Two aspects of institutional change Regional aspect

Government intervention Development of intermediate institution

Temporal aspect

Political Capital and Institutional Change

H1. The positive effect of entrepreneurs’ political capital on firms’ resource acquisition is likely weaker in regions where the level of government intervention is lower.

H2. The positive effect of entrepreneurs’ political capital on firms’ resource acquisition is likely weaker in regions where intermediate institutions are better developed.

HYPOTHESES

H3. The positive effect of entrepreneurs’ political capital on firms’ resource acquisition will persist or even get stronger over time.

It is generally expected that more market institutions will be developed over time.

However, institutional changes toward market orientation do not automatically lead to the decline of the role of political authorities over time. Path-dependent nature of transition

Inertia of old institutions is likely to be strong. China’s gradual transition

The existing institutions still bear the stamp of the past institutional arrangements.

Partial reform which confines only to economic arenas

“The state advances and the private sector retreats”.

“As the Chinese government has grown richer… it has pumped public money into companies that it expects to upgrade the industrial base and employ more people” and the beneficiaries re state-owned firms.

--Wines (2010, NYT)

Data sources Two national surveys of private

entrepreneurs in China conducted jointly by three national organizations: the Chinese Academy of Social Sciences, All China Industry and Commerce Federation, and the United Front Work Department of the Central Committee of the Communist Party in 2002 and 2006.

The Marketization Index developed by the National Economic Research Institute

Methodology

Surveys Random sampling approach

Though not a panel data, it provides a longitudinal view of how the hypothesized relationships change over time.

3,258 cases for 2002 and 3,837 for 2006 in 30 provinces

We only focused on those reporting the actual amount of loans from banks. N=1595 in 2002 N=1987 in 2006

Resource acquisition: the actual amount of loans from banks (logged)

Political capital Membership of People’s Congress (PC) and the

Chinese People’s Political Consultative Conference (CPPCC).

PC has five levels: national, provincial, municipal, county, and township. Its main functions include making law and policies, and electing and appointing top government officials (e.g., President and Premier).

CPCC is a political advisory body, exercising democratic supervision of the party. It has four levels: national, provincial, municipal and county.

Measures

Government intervention reduction (3 items) Distribution of economic resources is market-oriented Government intervention in firm activities is reduced Government scales back

Development of intermediate institutions Share of lawyers in the total population Share of accountants in the total population Degree of legal protection of production entities Degree of property right protection

Controls Entrepreneur’s education, age, party membership Firm age, size, R&D activity, industry, region

Results

    Year 2002 (n=1595) Year 2006 (n=1987)

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10                     Controls                    Firm age .046† .042 .040 .041 .041 .082*** .064** .062** .061** .062**

Firm size .014 .011 .012 .009 .007 .169*** .215*** .167*** .137*** .132***

Entrepreneur age .001 .016 .019 .020 .020 .044* .040* .040* .050** .051**

Entrepreneur as party member .017 .008 .018

.017 .016

.033 .038 .041

.045.047†

Number of prior jobs .011 .007 .005 .007 .008 .023 .009 .008 .009 .011R&D intensity .095*** .074** .075** .075** .076**

.027 .027 .031 .020 .012Industry (1=manufacturing) .181*** .126*** .149*** .149*** .149***

.006 .008 .009 .011 .006Region (1=coastal area) .013 .016 .017 .013 .011 .061** .060** .084** .072* .061*

Inverse Mills Ratio .502*** .377*** .454*** .450*** .447***.373*** .101** .222** .289*** .312***

 Independent Variables      

   

     

  

Political capital   .122*** .093** .089** .092**  .201*** .169*** .162*** .153***

Education   .128*** .127*** .126*** .122***  .221*** .214*** .213*** .213***

                     Moderators                    Government intervention reduction     .018

 .018

 .020     .047*

 .047*

 .060*

Intermediate institution development

     .067†

 .068+

 .057

   

.087**

 .082**

 .098**

 Interactions      

   

     

   

Political capital X government Intervention reduction

      -.023 -.035       -.080*** -.088***

Political capital X Intermediate institution development

        -.022         -.058**

                     Education X Government Intervention reduction

      .026 .011       .051** .043*

Education X Intermediate institution development

        .030         .041*

                   R2

.207 .232 .234

.236 .236

.276 .341 .347

.354 .358

Change R2  .025*** .003† .002 .000 .065*** .006* .007** .004**

F 46.06**** 43.37*** 37.23*** 32.45*** 28.71***83.63*** 94.61*** 80.65*** 72.16*** 64.63***

5

6

7

8

9

10

Low High

Ban

k L

oan

Political Capital

Moderating Effect of Government Intervention

Low Government Intervention

High Government Intervention

Haiyang LiYan Zhang

Rice University

Yu LiUniversity of International Business & Economics

Li-An ZhouWeiying Zhang

Peking University

Returnees vs Locals: Who Perform Better in China’s Technology Entrepreneurship?

Returnees possess superior capabilities and skills particularly in the technology areas through their education and scientific and technical training in developed countries.

They are exposed to the technological and business practice gaps between developed countries and their home countries.

They can access social networks that are typically not be accessible to local talents.

The presence of returnees serve as an important signal of the quality of the new ventures.

The Value of Returnees

After years of living out of their home countries, returnees face a seemingly familiar, yet different, environment.

Returnees may not have an accurate comprehensive understanding of how to conduct businesses there (Lack of local knowledge).

Returnees may have limited connections with important constituents in their home counties. Such connections are critical because they

represent important channels for accessing information and resources in emerging markets.

The Darkside of Returnees

Hypothesis 1. State controlling ownership will improve the performance of new technology ventures with returnee leaders relative to ventures with local leaders.

Ventures with state controlling ownership are considered as “insiders” in China’s political institution access to complementary resources

Returnees may rely on government ties precisely because they lack the social ties that facilitate competition in China’s personalized market (Solinger, 1991).

Help state-controlled ventures to explore overseas business opportunities.

State Controlling Ownership

H2. Older venture age will improve the performance of new technology ventures with returnee leaders relative to ventures with local leaders. As a new venture ages, it builds its track record

and external relationships, thus reducing its dependence on the personal connections of its leaders.

Venture age

Technology ventures in Zhongguancun Science Park (ZSP) in Beijing, China

Preferential policies in ZSP Qualification for being a high-tech firm Data is compiled from the annual reports filed by

all certified firms 1995-2003. Our sample consisted of 33,290 firm-year

observations from 13,163 firms.

Methodology

Random-effect Tobit model Random effect was used to address the lack

of independence among the multiple observations associated with one venture.

Tobit model was used because the dependent variable (Ln(Sales)) was skewed (most ventures had a small amount of sales).

Model Specification

  Employment Size Sales

  Mode 1a Model 2a Model 3a Model 4a Model 1b Model 2b Model 3b Model 4b

 Predictors

               

Returnees Venture -0.132***(0.021)

-0.149***(0.022)

-0.179**(0.026)

-0.190***(0.026)

-0.480***(0.077)

-0.513***(0.080)

-0.639***(0.094)

-0.656***(0.096)

 Moderators

               

State ControllingOwnership

0.301***(0.017)

0.291***(0.018)

0.300***(0.017)

0.292***(0.018)

0.384***(0.062)

0.365***(0.063)

0.383***(0.062)

0.369***(0.063)

Venture Age 0.066***(0.004)

0.066***(0.004)

0.064***(0.004)

0.064***(0.004)

0.403***(0.013)

0.403***(0.013)

0.394***(0.013)

0.395***(0.013)

 Interactions

               

Returnees Dummy*State Controlling

Ownership

  0.139*(0.057)

  0.119*(0.057)

  0.282(0.212)

  0.208(0.214)

Returnees Venture*Venture Age

    0.029***(0.009)

0.027**(0.009)

    0.103**(0.036)

0.098**(0.036)

 Controls

               

R&D Investment 0.230***(0.005)

0.230***(0.005)

0.230***(0.005)

0.230***(0.005)

0.506***(0.020)

0.506***(0.020)

0.506***(0.020)

0.506***(0.020)

Foreign-Owned Venture

0.250***(0.022)

0.252***(0.022)

0.251***(0.022)

0.252***(0.022)

0.692***(0.073)

0.695***(0.073)

0.693***(0.073)

0.695***(0.073)

Business GroupAffiliation

0.351***(0.025)

0.352***(0.025)

0.351***(0.025)

0.351***(0.025)

0.673***(0.094)

0.674***(0.094)

0.672***(0.094)

0.673***(0.094)

Educational Level of Legal Representative

0.072***(0.007)

0.072***(0.007)

0.073***(0.007)

0.073***(0.007)

0.075**(0.025)

0.076**(0.025)

0.077**(0.025)

0.077**(0.025)

Year Dummies Included Included Included Included Included Included Included Included

Industry Dummies Included Included Included Included Included Included Included Included

Constant 2.770***(0.262)

2.769***(0.262)

2.768***(0.262)

2.766***(0.262)

5.908***(1.020)

5.906***(1.020)

5.902***(1.020)

5.901***(1.020)

Wald Chi2(90) 4657.42 4666.21 4672.59 4678.64 5086.52 5088.97 5095.41 5096.84

Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Number of observations 33290 33290 33290 33290 33290 33290 33290 33290

  Profit Venture Exit (vs. Survival)  Mode 1c Model 2c Model 3c Model 4c Model 1d Model 2d Model 3d Model 4d

 Predictors

               

Returnees Venture -0.010(0.025)

-0.047+

(0.027)-0.065+

(0.034)-0.087**(0.034)

0.415***(0.078)

0.418***(0.082)

0.572***(0.101)

0.570***(0.103)

 Moderators

               

State Controlling Ownership 0.220***(0.020)

0.200***(0.021)

0.220***(0.020)

0.201***(0.021)

-0.111*(0.056)

-0.109+

(0.058)-0.110*(0.056)

-0.113+

(0.058)

Venture Age 0.109***(0.004)

0.108***(0.004)

0.106***(0.004)

0.106***(0.004)

0.010(0.012)

0.010(0.012)

0.018(0.012)

0.018(0.012)

 Interactions

               

Returnees Venture * State Controlling Ownership

  0.315***(0.074)

  0.295***(0.075)

  -0.030(0.237)

  0.038(0.235)

Returnees Venture * Venture Age

    0.035*(0.014)

0.027*

(0.014)    -0.103*

(0.043)-0.103*(0.043)

 Controls

               

R&D Investment 0.128***(0.008)

0.128***(0.008)

0.128***(0.008)

0.128***(0.008)

-0.290***(0.025)

-0.290***(0.025)

-0.290***(0.025)

-0.290***(0.025)

Foreign-Owned Venture

0.636***(0.022)

0.639***(0.022)

0.636***(0.022)

0.639***(0.022)

0.317***(0.051)

0.316***(0.051)

0.318***(0.051)

0.319***(0.051)

Business Group Affiliation 0.383***(0.032)

0.384***(0.032)

0.383***(0.032)

0.384***(0.032)

-0.146(0.108)

-0.146(0.108)

-0.147(0.108)

-0.147(0.108)

Educational Level of Legal Representative

0.044***(0.008)

0.044***(0.008)

0.044***(0.008)

0.044***(0.008)

-0.493***(0.022)

-0.493***(0.022)

-0.494***(0.022)

-0.494***(0.022)

Year Dummies Included Included Included Included - d - - -Industry Dummies Included Included Included Included - d - - -Constant -0.346

(0.389)-0.344(0.389)

-0.345(0.389)

-0.343(0.389)

-0.813***(0.060)

-0.813***(0.060)

-0.823***(0.060)

-0.823***(0.060)

Pseudo R2 - - - - 0.0446 0.0446 0.0448 0.0448Wald Chi2(90) 3565.56 3586.83 3572.69 3590.94 845.03 845.04 846.49 846.69Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000Log Likelihood - - - - -9259.47 -9259.46 -9256.92 -9256.91Number of observations 33290 33290 33290 33290 33290 33290 33290 33290

How do entrepreneurs’ political capital interact with institutions to affect resource acquisition in the context of transition economy. It is not institutional change per se but the

changes along different dimensions that are likely to induce the changing effects of political capital observed.

Institutional change is not homogeneous.

“A dual liability” for returnees may be created by institutional changes State controlling ownership helps mitigate their

disadvantages

Some Thoughts

Makes a significant contribution to the literature on the role of managerial resources in entrepreneurial firms. Both human capital (education) and political

capital are increasingly important.

Thank You!